Question of the Day

Did illegal voters swing any congressional races?

There's an old saying: Be careful what you wish for, you might just get it. Financial markets clearly favor political gridlock. They have no faith in either party to lead this country competently, and markets are deeply skeptical about major changes in policy. They like the way things have gone for the last six years, with a Democratic president and a Republican Congress, and probably would have voted to continue that situation indefinitely if possible.

Now we have a situation so hopelessly gridlocked that even the simplest government activities may be difficult to undertake. We will have a president who will be viewed as illegitimate by many Americans, because no matter who the ultimate winner is, the loser will have a claim he should have been declared victorious. The Senate will be deeply split, making routine decisions such as committee chairmen unusually difficult. In the House, where Republicans have had great difficulty coping with a thin majority, their majority is now thinner still.

Therefore, we can conclude that the next president will not have much opportunity to enact legislation. This will include not only that widely viewed negatively by financial markets, but also that which is needed. A good example of the latter is legislation to replace the foreign sales corporation tax law. The World Trade Organization recently declared this provision to be illegal, and U.S. firms face penalties unless the law is changed quickly.

There will, no doubt, be other such issues in coming years, in which positive legislative action is needed on some pressing problem that simply cannot be resolved due to gridlock. At that point, markets will discover it is very much of a two-edged sword.

Another consequence of gridlock is that the next president will be forced to rely more heavily on unilateral actions that do not require congressional approval, such as executive orders and government regulations. Indeed, there are warnings that Bill Clinton is rushing ahead with a massive slew of "midnight regulations" that he hopes to make final by Jan. 20.

Among those fiercely opposed by the business community are new ergonomics standards; blacklisting of government contractors that don't abide by various environmental and safety standards; new pension rules from the Labor Department; and new securities regulations affecting accountants. The Environmental Protection Administration alone has some 88 new regulations it hopes to ram through. Should all these rules by finalized by publication in the Federal Register, they will add billions of dollars per year to business costs.

Some analysts are already urging that George W. Bush immediately impose a moratorium on new government regulations, should he prevail, as Ronald Reagan did in 1981. That would allow time to review these new regulations and possibly rescind some of them. But even here, businesses may find there is a dark cloud as well. When Mr. Bush's father imposed a moratorium on regulation during his presidency, many businesses protested they needed some of the regulations and were being hurt by the moratorium. For example, the Treasury Department was unable to issue regulations that clarified provisions of the tax law. In this case, the lack of guidance was a burden to many businesses.

Businesses should also be aware that increased emphasis on regulation, instead of legislation, deprives them of an opportunity to influence the ultimate result and puts more power in the hands of politically unaccountable bureaucrats. Although the U.S. regulatory process is fairly transparent by international standards, it is still far more difficult for businesses to stop or change a pending regulation than a pending piece of legislation.

To be sure, the regulatory process will be strongly influenced by Mr. Bush's appointees, who presumably will share the general disdain Republicans have for it. But as we saw during the Reagan and Bush administrations, that process rolls forward regardless of which party is in power. Furthermore, Mr. Bush will be severely constrained by the difficulty in getting appointees with a strong deregulatory view confirmed by a deeply divided Senate. And of course, many of the most important regulatory bodies are independent of the administration, with members serving fixed terms. It will be a long time before Mr. Bush has the opportunity to appoint a majority to many such bodies, such as the Federal Communications Commission.

Lastly, there is a danger with gridlock that Mr. Bush or Mr. Gore will in effect be forced to pay too much for the legislation they decide they really want. For example, some people in financial markets who are opposed to a big tax cut, because it would reduce the surplus, fear Mr. Bush might be willing to go along with a big increase in spending in order to get Democratic support. Conversely, Mr. Gore might try to buy Republican support for higher spending with a big tax cut. In such a case, gridlock would lead to a worse result, from the point of view of Wall Street.

In conclusion, the superficial appeal that gridlock has for financial markets and the business community could well turn to repulsion fairly quickly. What they really want is not gridlock per se, but continuation of the status quo, in terms of continued economic growth and a higher stock market. However, the status quo cannot continue indefinitely. Change must and will occur. The challenge will be to ensure those changes are guided by wisdom and common sense.